The story of India’s ever-growing Forex Reserves at the time of fiscal slippage

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Updated: February 2, 2018 8:27:49 PM

Five months ago, on September 8, India's Forex Reserves touch the $400 billion mark for the first time, then slipped below the mark; and then, once, again, touched in the mark after five weeks.

The story of India’s ever-growing Forex Reserves at the time of fiscal slippage (Image: Reuters)

Five months ago, on September 8, India’s Forex Reserves touch the $400 billion mark for the first time, then slipped below the mark; and then, once, again, touched in the mark after five weeks. Since then, the Forex Reserves have been growing in size, hitting a new lifetime high continuously for the last four weeks — sometimes by $500 million and sometimes by $3 billion. In the week to January 26, the foreign exchange reserves rose sharply by $3 billion to $417.789 billion.

And India’s record forex reserves comes against the backdrop of the tight fiscal situation, wherein, Finance Minister Arun Jaitley announced fiscal slippage by 0.3 percentage points to 3.5% from targeted 3.2% of the GDP. And, while rating agencies like S&P and CRISIL is worried about the fiscal math, the forex reserves over $400 billion was lauded by both S&P and Moody’s. “Despite two-quarters of weaker-than-expected growth, India’s economy is forecast to grow robustly in 2018-2020 and foreign exchange reserves will continue to rise,” S&P had said last November.

S&P said that it was good enough to cover for India’s imports. “Reserve Bank of India’s foreign exchange reserves stood at above $400 billion in October 2017, amounting to over six months of import cover, a sizable buffer.” A similar opinion was of Singapore-based DBS Group, which said, that the reserve stock is sufficient to “cushion India against external vulnerabilities”.

But this did not go well with the US Treasury. It, in November, frowned at India and said that it was “closely monitoring” the central bank’s activities as there was a “notable increase in the scale and persistence” of dollar purchases. The US Treasury did not put India on its list of potential currency manipulators but did put the international spotlight on India.

On the news, former RBI governor Raghuram Rajan defended the country by saying that the US should not label India as currency manipulator simply on the basis of one metric. “I don’t suspect the Treasury will do that, but it shouldn’t, even if it’s thinking of it,” he told CNBC on the sidelines of the Barclays Asia Forum in November.

“The result has been an accumulation of forex reserves as the RBI has curtailed undue appreciation of the currency and tried to keep the INR in its fair trading band,” Richa Gupta, Senior Economist, Deloitte India told FE Online. She added that it is unlikely for the US Treasury to react negatively to development as “India does not have a very important base of manufacturing exports to the US”.

There is no official statement from the RBI on the record forex reserves, or the US Treasury’s allegations. India’s forex reserves grew dramatically in between April 2007 and February 2008 from $200 billion to $300 billion and stayed between $300 billion and $400 billion for more than nine years, before touching the $400 billion last September. “India’s foreign reserves rose sharply driven by portfolio inflows, investment flows and a narrower current account deficit,” DBS said in a note.

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